European Free-Riding: “We pay for [Europe’s] military protection, we pay for the profits that develop the drugs and consumer goods they happily consume, and now we’re supposed to pay for their economic bailout too.”

Even if one accepts Altrig’s explanation of the Fed’s motivations in creating these new credit facilities, the fact remains that they’re (effectively) engaging in the process of credit allocation by engineering policy to lower rates normally set by the private sector. If that sector’s processes for setting such rates is disrupted by “dysfunctions in markets”, the proper solution is to fix the root causes of those dysfunctions. E.g., fix the financial system, killing off zombie banks, possibly governmental CDS. By contrast, the Fed’s policy of “brick breaking” is, effectively, putting a band-aid over the aforementioned problems. While (at best – at worst it keeps zombies on life support) this policy basically buys time for the financial sector to heal itself, by allowing the rest of the private sector to continue functioning even in the face of financial-sector dysfunction, the price of such massive Fed intervention is that private actors become accustomed to the existence of such interventions, to the point where they have a vested interest in keeping such interventions going indefinitely. Such a massive & fundamental intertwining of a government agency (i.e., the Fed) with the financial sector may eventually result in the former becoming a conduit for politicizing the latter’s business decisions. In particular, how long before politicians attempt to transform this newfound Fed power (to directly set formerly-private interest-rate spreads) into another conduit for B&C?

Given the existence of an impaired financial system, credit easing was probably necessary to avoid an even more severe downturn. However, my preference would’ve been to fix the root cause – i.e., fix the financial system, so as to restore private willingness to lend thereto – rather than keep zombie banks on life support for years to come. Admittedly, the latter course of action (which basically amounts to forbearance & the like) may work, if the banks lend prudently. My concern is that that they won’t (whether due to bad management or politicized lending). S&Ls abused forbearance to make even more risky loans in a vain attempt to earn their way out of insolvency.